Once Upon A Time…
In 2010, I created an IRS tax liability for myself by claiming exempt which enabled me to get all the coins I earned (income tax-free) for that year (although I still had to pay Medicare & Social Security taxes).
I claimed exempt because I needed all my income that year as I had been out of work from September 2009-January 2010. So, I had to play catch up on some things. I rationalized (like when you pay off a credit card or car loan and tell yourself the backslide is only temporary and you will pay it off quickly) that my current need was greater. I convinced myself that I would save up the last six months of the year and have what I needed by the time taxes would come due.
Recognize and Heal Your Anxiety Because It Is Expensive
Now I’m a creative person–often an idea machine. Looking back, I cram to understand why I was able to be creative in other areas of my life but that creativity didn’t transfer to me thinking of ways to earn extra money so as to eliminate my need to take such a risk.
I’m suspecting that my being prone to anxiety was a huge factor and clouded my judgment. When you live under money stressors (like I have for a lot of my adult life due to ignorance and anxious choices), it puts wear and tear on your mind truncating creativity, energy (e.g., to work extra), and optimism. You just go into a “let me do whatever is most easy to maintain my sanity and survive another day” mode. So when the 2011 tax year came, I owed about $2500.00 in federal taxes and about a grand in state taxes. I can’t remember the exact figures but I know it was approximate $3,000.00 total.
And guess what? When those tax bills came due, I didn’t have it.
Solution-oriented, I urgently poked around on the internet and learned about an IRS program called Offer In Compromise. So I reached out, put on my old real estate negotiation hat, pitched my hardship, and started the paperwork and verification of my claim.
What is an Offer In Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. The grounds upon which one can qualify for an OIC acceptance are stated on the IRS website as follows:
The IRS may accept an OIC based on three grounds:
- First, the IRS can accept a compromise if there’s doubt as to liability. A compromise meets this only when there’s a genuine dispute as to the existence or amount of the correct tax debt under the law.
- Second, the IRS can accept a compromise if there’s doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
- Third, the IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there’s no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
I was able to qualify for an OIC based on the second ground.
So what are the steps?
- Meet one of the criteria above (e.g. they will verify thoroughly).
- Submit the appropriate forms as instructed on the OIC section of the IRS website.
- Pay the application fee of $186.00. This fee can be waived based upon income. (see the rules). The application must include:
- Form 656, Offer in Compromise
- Completed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, if applicable
- Completed Form 433-B (OIC), Collection Information Statement for Businesses, if applicable
- $186 application fee, unless you meet Low Income Certification
- Initial offer payment, unless you meet Low Income Certification
- NOTE: The “initial offer” is determined by the completing the applicable worksheet on the forms listed above. Your current income, assets, expenses, juxtaposed to the tax liability determines your “offer.” This part of the process is where #4 (communicating with your IRS OIC agent) is crucial. For this is where you can lobby and negotiate for yourself if that figure is still beyond your means to pay. So, stay in touch.
- Call them. Get someone from the OIC department on the line and let them know you have submitted paperwork and find out if they have received it. This helps to ensure you crossed all your T’s and dotted all your I’s so as to prevent any hold up of the review and approval of your request. Find out the person who will be working your case (I had a direct phone number after I got to a certain milestone in the process).
- Repeat #4 until your final figure is settled. Any monies you send in as part of the initial offer payment is applied to tax liability.
It is a very tedious bureaucratic process (after all it is the government) but is worth it. and state’s economic hardship plan (check with your state as some states have a companion income hardship repayment program).
Because the process is very tedious, there are various companies that offer to do the work for you for a fee. The advertise under claims like, “Tax Debt Relief” “Tax Relief Experts.” I am unable to comment on such services other than to say, I hear some are legit and helpful and some are not and scammy. The purpose of this post is to let you know that you can do it yourself for FREE.99 if you are willing to do the work and exercise the patience.
Before hiring someone, you should consider that because it is a tedious process, when you delegate this important task to a third party, you are left to rely on their word about the progression of your case with the IRS. It can present a challenge to be sure of their work ethic or how attentive they will be to follow-up and follow-through on key milestones and deadlines. You already have the built-in lethargy of government bureaucracy to factor in–and you need someone you can trust to be on top of follow-up and any deadlines. You will also have a few hundred dollars in fees to pay these services on top of the OIC $186.00 application fee and your liability.
Hiring a third party may make sense (after extreme vetting of the company and their results) IF you have a huge tax liability or are several years behind.
Give It A Try
Reply in the comment section below or on one of my social channels if you have had an experience filing an OIC with the IRS? Was it successful? Positive or negative? What are you doing to ensure you never have to owe the government taxes again? How do your plan to take action, going forward, so you can save stacks of cash instead of paying it out to the IRS or to other debtors every month? If you found this information helpful, please let me know and share it with anyone you think could use it.